Becoming a real estate investor is a more lucrative opportunity than ever before. But it also requires being smarter than ever before if you want to succeed. How do you go from being a new investor to being a smart investor? It’s not an overnight process, but you can speed it up by following a few simple tips and guidelines.
- Keep Tabs On All Expenses
It’s easy to overlook a small repair cost here and there, but this is a terrible habit to keep as each of those small expenses will eventually add up into something larger. The problem compounds and becomes worse as your business grows and you acquire more properties. It’s important that you keep track of each and every expense associated with buying, owning, or selling a property.
This includes expenses that occur while a tenant is renting the property. As the homeowner, most of the property repairs will be your responsibility. If you find that your accounts aren’t looking as impressive as they should, then you may need to take a step back and look for any number of small expenses that you may not have accounted for.
- Calculating Carrying Cost
This falls into a similar category as the previous piece of advice. Carrying costs refer to the expenses that are required to own a property. The list includes insurance, utilities paid for by the owner, taxes, mortgage payments, maintenance costs, business license fees, and vacancy expenses. All of these costs are going to take a bite out of your bottom line. If you don’t take the time to account for them, then you’re going to be surprised when your ROI is much lower than projected.
Understanding the carrying cost of a property will also help you accurately price the property for rental. If your rental income for all of your properties isn’t balancing out the carrying costs, then your business is sinking rather than growing. This brings up the third point, which relates to the rental cost for properties.
- Obey The 1% Rule
More advanced investors may be able to ignore this rule and still make a profit, but it’s best for all newcomers to obey this rule closely until they have plenty of experience in the market. The 1 percent rule is extremely simple. It states that you should not invest in a property if you cannot earn 1 percent of the total cost of the property each month. For example, you must be able to earn a rental income of $1,000 per month if you are going to pay $100,000 for the property.
Obviously, this rule does not apply if you do not plan on renting the properties for tenants. And it is always best to aim for more than 1 percent each month. But keep this percentage as a bottom line and do not waiver when considering investing in a new property. The 1 percent rule is a powerful tool for controlling risk.
- Don’t Forget Closing Costs
We’ve already discussed carrying costs and the importance of tracking small repair costs, but there is a third expense category that must be considered as well. Closing costs refer to the expenses that are required to buy or sell a property. These fees are often accumulated during the process of trying to buy or sell a home and are then paid for at the end of that process. Thus, they can easily accumulate without notice if you are not paying close attention.
There are a number of factors that can impact your closing costs. For example, if you choose to pay property taxes through a lender when purchasing a property, then your final closing costs could include several months worth of property taxes. The same applies to certain forms of insurance.
Your location is another factor that will influence closing costs. Certain cities require large transfer taxes to be imposed on the buying and selling of real estate properties. Familiarizing yourself with local real estate regulations prior to investing is always a good idea.
There’s no perfect method for calculating closing costs, but you can roughly estimate that closing costs will be around 5 percent for the buyer and 10 percent for the seller. That percentage is based on the purchase price of the property.
- Focus On Networking
Real estate investing is a lot different today than it was fifty years ago. Focusing on networking is more important than it has ever been. You should constantly be attending real estate networking meetings so that you can acquire more contacts in the business and increase your chances of success. Powerful relationships can make all of the difference when it comes time to buy or sell a new property. That being said, beneficial relationships will take some time to build.
There are more tools than ever that can be used to boost your networking presence. Real Estate Investing(REI) groups exist in every state and in most of the major cities. There are also dozens of websites that you can use to meet new contacts and expand your dome of influence.
- Learn About The Tax Game
The government wants real estate investors to provide housing for the community. They care because if investors don’t provide the housing, then the government will have to. The more work the investors can do the less work is required of the government and the more money the government saves. Thus, they offer a number of tax incentives to real estate investors that will help this cause.
These government tax breaks come in addition to normal business tax benefits and deductions. One example of a government-funded tax benefit is the depreciation write-off. This benefit allows you to write off a building’s depreciation as a deduction after investing. It provides significant savings that should not be ignored. Neither should any of the other tax benefits offered to real estate investors.
Become A Smart Investor
These tips alone won’t make you a smart real estate investor, but they will certainly help. Becoming a smart investor requires constantly learning and evolving with the market. What is most effective today may not matter in ten or twenty years. Pay attention to detail, keep up with the trends, and never stop learning.